Ethena: Building the Crypto-Native Synthetic Dollar

Ethena is a synthetic dollar protocol on Ethereum designed to offer a crypto-native solution for money that is independent of traditional banking systems. Although not officially termed a stablecoin, its synthetic dollar, USDe, is dubbed the “internet bond.” It maintains a stable value pegged to the dollar through delta hedging derivative positions against collateral held by the protocol.

After just three months, Ethena's USDe has reached a $3.5B TVL, rapidly gaining market share. It is now the fourth largest “stablecoin” by market cap, trailing only USDT, USDC, and DAI.

Stablecoin Market and History

Stablecoins have proven their value and product-market fit by enabling DeFi as a financial system. They facilitate trading on both centralized and decentralized exchanges and serve as a store of value to hedge against crypto market volatility. Their primary goal is to maintain a stable value pegged to another asset, usually a fiat currency, through various mechanisms. Most stablecoin designs face a tradeoff between decentralization and capital efficiency in their pursuit of price stability. This challenge is known as the Stablecoin Trilemma, which involves balancing price stability, capital efficiency, and decentralization.

Most stablecoins today can be categorized into three types: fiat-backed (e.g., USDT, USDC), crypto-backed (e.g. DAI), and algorithmic. Centralized, fiat-backed and decentralized, overcollateralized crypto-backed stablecoins have successfully maintained their pegs but often sacrifice one of the other trilemma dimensions—capital efficiency or decentralization. Algorithmic stablecoins initially managed to balance the trilemma but eventually revealed their vulnerabilities under market pressures, as demonstrated by UST. 

Fiat-backed stablecoins ensure that each USD-pegged token is backed 1:1 by real USD, relying on traditional banking systems to hold the reserves. USDT, issued by Tether Holdings, dominates this category with 69.9% of the total stablecoin market cap. Other notable fiat-backed stablecoins include USDC from Circle and BUSD from Binance. Together, USDC and USDT account for 89.5% of the total stablecoin market cap, with $32.2B and $112.8B, respectively.